Government Incubator Heats Up

The Small Business Administration's venture-capital program provided more than $2 billion in financing to 1,331 small businesses in fiscal 2010.

That’s a 10 percent increase for Small Business Investment Companies compared with the previous year. SBICs are privately owned and managed VC firms that are licensed by the SBA. They raise their own money, but also leverage financing provided by the SBA. They invest in small businesses, filling gaps for smaller VC investments and in industries and geographic areas often neglected by other venture capital firms.

They’ve hit some home runs over their 52-year history: Federal Express, Outback Steakhouse, and Callaway Golf received SBIC investments in their early years.

But they also struck out a lot, especially when the tech bubble burst. Large losses to the federal government from SBIC equity investments led the SBA to begin winding down one SBIC program, participating security investments, in 2004. As a result, these equity investments have been dropping dramatically every year. In 2010, for example, participating securities investments totaled only $336 million, compared with $1.5 billion in 2006. The end of the participating securities program had resulted in annual declines in total SBIC financings until 2010.

Now, however, the other part of the SBIC program—debentures, or long-term loans to small businesses—is beginning to take off. This program provided a record $1.6 billion in financing to small businesses in fiscal 2010. That’s up 23 percent from fiscal 2009.

The SBA also reduced the time it took to license new SBICs in 2010 to less than six months, instead of more than a year. This helped it to license 21 new SBICs in 2010, compared with an annual average of 10 during the previous four years.

There now are more than 300 SBICs, with more than $16 billion in capital under management.

Startups accounted for 225 businesses of the 1,331 small businesses financed in 2010 by SBICs. The average investment grew to $833,862. For the debenture program, the average investment topped the $1 million mark, compared with $807,526 in 2009.

SBIC investments aren’t for everyone. Plus, it will take some time for the debenture program to make up for the financing lost from the demise of the participating securities program. But the growth of the debenture program means that the FedExes of the future will have a better shot of getting off the ground.

“Across the country, there are small-business owners and entrepreneurs who are well-positioned to take that next step, grow their business, and create good-paying jobs,” said SBA Administrator Karen Mills. “Our efforts to strengthen program efficiency and increase funding available through the SBIC program has provided another critical tool to help those small businesses get the capital they need and drive economic growth.”

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Kent Hoover is the Washington bureau chief for bizjournals.